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Share buyback champions with positive FCF and dividend yields of more than 3.5%

January 15, 2012 | About:
Whenever the company uses their excess cash to buy back shares, it would reduce the amount of share outstanding, meaning that the pie will be divided into larger pieces with smaller amount of pieces. That would push the earning per share, cash flow per share, FCF per share up and benefits existing shareholders. Value investors would feel satisfactory to see any companies which consistently reduce the share outstanding number. So that would be one of key indicators for searching the long-term investment opportunities. Along with that, the firm should be profitable and positive free cash flow for the last three years, and last but not least, paying out dividends at the yield of at least 3%, the screen excludes the banking sector. Here are the top 04 candidates:

Astra Zeneca (AZN), the global biopharmaceutical company. It discovers, develops and commercializes prescription medicines for six areas of healthcare: Cardiovascular, Gastrointestinal, infection, Neuroscience, Oncology and Respiratory and Inflammation. The operation of AZN is in over 100 countries including China, Mexico, Brazil and Russia. The firm got dynamic operations and an aggressive acquisition strategy to offset the patent losses and create growth. Since 2001, AZN has reduced the total share outstanding numbers from 1.76 billion to 1.3 billion, the reduction of over 20% for the last 10 years. In the same period, the free cash flow has advanced from $1.7 billion to $8.5 billion in 2010. The debt/equity is around 54/46. The total dividend in 2010 was $2.7, on the current price of $46.7, it yields 5.78%. It is trading at only 6.4x earnings, 2.6x book value and having the cash flow yield of 12.8%.

Vodafone (VOD), the mobile communications company operating globally providing communication services including voice, messaging, data and fixed-line solutions and devices to assist customers in meeting their total communications needs. VOD has equity interests in over 30 countries and over 40 partner markets worldwide. Currently it got around 361 million proportional customers calculating by total customers multiplied by its ownership interest), including 45% stake in Verizon Wireless. In 2002, it got more than 7.2 billion shares outstanding, and now the number of shares has reduced to around $5.2 billion, eliminating nearly 28% total share outstanding. Over the 10 year historical period, it consistently generated positive free cash flow, although fluctuating, and now the TTM free cash flow stays around $5 billion. The dividend yield now is 5.38%. Currently, the market values VOD at 12.9x earnings, 10% above the book value and 7.8x cash flow.

Eni SpA (E), the oil and gas exploration and production company engaging in gas marketing operations, management of gas infrastructures, power generation, petrochemicals, oil services and engineering industries. The company got operations in 79 countries worldwide. E is famous for its access to foreign governments to secure new upstream oil & gas deals. That is why E is successful in operating in very difficult markets such as Africa, Middle East and Russia. E is the largest international oil and gas producer in Africa. For the previous 10 years, the share outstanding has been reduced from 1.96 billion to 1.8 billion. In the same period, the firm has generating the consistent positive although fluctuating in operating cash flow. As any oil & gas major companies, the free cash flow is fluctuating widely but still positive, and recently half of its E&P budget is spending in Africa. It got 4.9% dividend yield, and the market is valuing E at 9.7x earnings, 1.1x book value and only 4.1 operating cash flow.

Meredith Corporation (MDP), the media and marketing company involving in magazine publishing and related brand licensing, television broadcasting, integrated marketing, interactive media and video production related operations. It has two segments, the national media includes magazine publishing, brand licensing, integrated marketing, etc, and the local media segment is mainly the operations of network-affiliated television stations. It publishes more than 25 magazines, having Better Homes and Garden, Family Circle, Ladies’ Home Journal, and Parents. MDP has reduced its number of shares from 51 million in 2002 to just 46 million currently. It got positive operating and free cash flow over the 10 year period, ranging from $120 to $185 million. MDP got the history of paying consistently increasing dividends. In 2002, yearly dividend was at $0.35 per share, and it has increased to nearly $1 in fiscal year 2011, giving the yield of 3.6%. MDP’s current valuation is 11.3 P/E, 1.8x P/B and only 6.7x P/CF.

Disclosure: No position

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 3.7/5 (14 votes)

Comments

DocMoney
DocMoney - 2 years ago
I like the concept of "share buyback champions." I think prudent share buybacks are perhaps the most underestimated way businesses can create wealth for shareholders.

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